"You can have your own theories but you can't have your own facts." - Carl Sagan Bullish tech markets are rarely without curious dislocations. And right now, one of the biggest imbalances can be seen in the huge momentum behind EV stocks such as Tesla Inc. (NASDAQ:TSLA) and the lithium market, which has remained in bear territory for years now.
Over the past couple of years, a cross-section of analysts, including Goldman Sachs, have tried calling a bottom on lithium prices, reckoning on a significant contraction in supply as persistently low prices limited production of one of the key commodities in the EV powertrain. That has not happened.
And now one of lithium's leading producers, Albemarle Corp.(NYSE:ALB), has just warned that global supplies of lithium are on track for a major shortfall by 2025 fall if prices do not rebound to fund expansions as EV demand explodes.
Eric Norris, who runs the lithium business for leading producer Albemarle, has highlighted the chasm between discount-hunting EV manufacturers and lithium producers who are unable to meet growing demand at current prices.
The lithium market appears to be finally waking up to this reality, with prices for battery-grade lithium carbonate in China soaring to 59,000 yuan ($9,102) on Monday, up nearly 50% on the August 2020 price.
Investors started pouring into lithium years ago, anticipating the very same supply crunch that Albemarle warns is now looming. They jumped the gun then, partly out of poorly timed over-enthusiasm, and partly because the logic ran like this: Any new lithium mines that could contribute to the EV battery onslaught would take years to bring online, from scratch--so best to get started in advance.
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Now, with the EV boom squarely in front of us, and with battery gigafactories promising to be heavy hitting purchasers, we can finally see the supply crunch forming.
Commodity bull market Last year, global lithium supply and demand were nearly even, according to data from Benchmark Mineral Intelligence. Lithium dropped last year partly due to the coronavirus pandemic, forcing producers like Albemarle and Sociedad Química y Minera de Chile S.A. (NYSE:SQM) to pause expansions.
However, demand is expected to outstrip supply by nearly 228,000 tonnes by 2025, which will inevitably lead to higher prices.
According to Norris, lithium prices still need to climb another 10% from here to make any expansion worthwhile.
Luckily, lithium bulls have another potent force on their side: The commodity bull market.
A cross-section of Wall Street luminaries from Pimco to Point 72 have predicted a broad commodity rally thanks to the so-called reflation trade. Indeed, Wall Street is predicting a new commodity bull market that will rival the oil price spikes of the 1970s or the China-driven boom of the 2000s. Market experts, including Goldman Sachs, believe the commodity boom could rival the last "supercycle" in the early 2000s that powered emerging BRIC economies (Brazil, Russia, India, and China).
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Iron ore prices hit a 10-year high of $176.90 a tonne shortly before Christmas; copper topped $8,000 a tonne--a 7-year high while global oil prices are hovering at a 12-month high of $55 a barrel.
Market sentiment has generally been shifting from deflation fears to reflation hopes, thanks to investors growing more confident about the ability of governments to stimulate growth via adaptive fiscal policies. Value stocks, financials, and cyclicals are expected to be the biggest beneficiaries of this reflation trade, especially in mature stock markets. Most commodities are cyclical in nature, and the lithium boom is about to replace the bust cycle that has dominated for years.
The ongoing global economic recovery is also expected to help ease commodity prices, including lithium.
After a horror show in 2020 due to Covid-19, most pundits are predicting a global economic recovery that could last for a couple of years. The World Bank sees the global economy expanding 4% in 2021, as the COVID-19 vaccine rollout becomes widespread throughout the year.
Most experts, though, are warning that a recovery is likely to be subdued unless policymakers move decisively to tame the pandemic.
The vaccination program in the United States has so far been progressing at a slower-than-expected pace, with the nation's top infectious disease expert, Dr. Anthony Fauci, saying there's plenty of room for improvement.
So far, only 5.3 million people have been vaccinated nearly a week into the New Year, way short of the 20 million vaccine target. But as Fauci noted, the new vaccination program is new, which inevitably means negotiating a steep learning curve.
By Alex Kimani for Oilprice.com
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